Cisco to buy Meraki for $1.2 billion

By Dan Nakaso dnakaso@mercurynews.com

Posted:
11/19/2012 05:52:27 PM PST

Cisco Systems (CSCO) continued to beef up its portfolio of cloud-based networking offerings with its announcement Monday that it intends to acquire San Francisco-based Meraki for an estimated $1.2 billion in cash.

Privately held Meraki was started by three Ph.D. candidates at MIT in 2006 and today focuses on mid-market companies in need of cloud networking and mobile device and security services. In cloud computing, data is managed from Internet-based servers.

Meraki's estimated 330 employees will become Cisco employees but will continue to work out of Meraki's headquarters, Meraki CEO Sanjit Biswas wrote on the company's website Monday.

Shares of San Jose-based Cisco closed on the technology-driven Nasdaq composite index at $18.30 Monday, up 1.7 percent.

Meraki -- it's Greek for "doing something with passion and soul" -- will form Cisco's new Cloud Networking Group that will be run by Biswas.

Meraki officials did not return calls from this newspaper for comment, but Biswas wrote in a letter to employees that after the offer from Cisco, "our initial reaction was to politely say, 'thanks, but we're planning to do our own thing and take Meraki public.' .... They had been hearing from customers, partners and analysts that Meraki had built something truly different, and wanted to see if Cisco could distribute the technology on a worldwide scale through their vast sales channels.

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"As a result, they'd like us to be a new 'Cloud Networking Group', based out of S.F., fun office, free food and all."

Cisco said it intends to close the deal at the end of its next fiscal quarter in January. No layoffs are planned.

"The acquisition of Meraki enables Cisco to make simple, secure, cloud-managed networks available to our global customer base of midsize businesses and enterprises," Rob Soderbery, Cisco Enterprise Networking Group's senior vice president said in a statement. "Meraki's solution was built from the ground up optimized for the cloud ... and is already in use by thousands of customers to manage hundreds of thousands of devices."

Jason Noland of Baird Equity Research told this newspaper that he estimated that Meraki has revenues of about $80 million, with a 70 percent gross margin.

In a note to investors, Noland wrote, "We view Meraki as a high-quality participator in some of the fastest-growing parts of the networking market. However, we are somewhat perplexed by Cisco's proactive effort to acquire expensive assets with overlap to its current portfolio."

Brian Marshall of ISI wrote in a research note that Meraki has more than 18,000 customer networks around the world in 145 countries, including Toyota, Burger King, Applebee's, Starbucks, Nordstrom, Holiday Inn, Stanford and MIT.

The company has raised more than $80 million in funding from investors that include Google (GOOG), DAG Ventures and Sequoia Capital and is cash flow positive, Marshall wrote.

Since Cisco has more than a 50 percent share of the enterprise Wi-Fi market, Marshall wrote. "We are somewhat surprised (Cisco) chose to make a sizable acquisition rather than develop new capabilities internally."

Cisco officials did not respond to requests for comment on analysts' concerns.

Contact Dan Nakaso at 408-271-3648. Follow him at Twitter.com/dannakaso.

meraki
Founded: In 2006 by three Ph.D. students at MIT
Based: San Francisco
Employees: About 330
Annual revenue: Estimated at $80 million